The Market Was Wrong About Apple May 3rd, 1999 They say, ad nauseam, the market is never wrong. Bullhockey, if the market were never wrong then there would never be any opportunity for traders to make any money on the difference between perceived value and real value. The market has been dead wrong on Apple for months and is only now, belatedly, acknowledging how under valued Apple really is. Recognizing when the market behaves like a blind, bumbling, ham-fisted giant and when it's the Oracle of Delphi is the talent it takes to make money in the stock market. Last week the oracle finally spoke dictating a remarkable surge in AAPL that has been characterized by high volume (2 to 5 times normal!) and helped along by short traders stampeding for the exits. Thus, Apple finally broke out of the lame 30-something trading range we've been stuck in since January. Resistance that might have materialized at these levels dissolved rapidly as investors who bought in at the highs of January choose to hang tough. The Goldman-Sachs upgrade last week was a positive, but it doesn't fully explain the over the top strength we see here. In fact, Goldman, ever the cautious moneymonger, waited till AAPL's big move was sorely evident before raising the out perform flag. If the market cooperates AAPL is primed to set a new 12-month high this week. Technicians and Fibonacci geeks tell me a 30% pull back from whatever is the high is natural, but we're not likely to see the 30's again for a long while, if ever. With the Apple Worldwide Developer Conference opening on May 10th you can expect some cool announcements from that old charmer, Mr. Jobs. As well as a more thorough exposé of the radical new paradigm in computer design and marketing that Apple is pursuing. http://www.apple.com/developer/wwdc99/ So why has AAPL's price switched from stagnation mode to a momentum play? In last week's column I listed a litany of possible reasons for those of us who need cause and effect scenarios to stay sane. However, I made up a few more for this week's column. Tech Are Out, Cyclicals Are In That's a headline I cribbed from Wall Street Journal last week. Within those few words lies the key to Apple's new place in the economy. Bear with me here... PCs have been completely commodified except for a few high-end offerings. The on-going price wars among the great PC manufacturers like Dell, Gateway and Compaq are spiraling the profit margins down and creating a vast new market for under $500 PCs. At that price and below American manufacturers will increasing find that the Koreans and others will, slowly through attrition, displace them (or subsume them) from the market space. This is the hidden message of IBM's new multi-billion dollar parts supply deal with Dell. IBM is quietly exiting the PC manufacturing stage for greener fields and their stock value has been amply rewarded for their foresight. Another sign of the times is the recent spate of Hewlett Packard ads, that if taken at face value, signal a retreat from the hardware business while shifting focus to providing services in a net based information economy. Why? Because American companies have never been good at holding on to market share once the product becomes commodified and the profit margins slip below levels that shareholders consider acceptable. A quick refresher course on the history of the VCR and television manufacturing gives a preview of what could await the PC manufacturing landscape of the 21st century. Don't believe the sun is setting on the age of the American PC manufacturers? E-machines, a privately held Korean upstart less than a year old already has a sizable chunk of the sub-$500 PC market space and is growing faster than any other PC manufacturer in the world. In fact, they're hoping to become the fastest growing enterprise on the planet by the end of this year. The fat lady has taken the stage. Unlike the American PC behemoths with their first world overhead and their nostalgia for the old 386 glory days, E-machines is built from the ground up to capitalize on that legendary consumer electronic "sweet spot" just under $500. And they're milking it for all it worth at the expense of older PC companies who still have not adapted their business model to fact that they're mere vendors of an ubiquitous commodity item that no one is going to pay a penny more for than they have to. There is no value-added benefit to buying a Dell over a HP or an E-machine; it's all Tupperware for the masses. Sure, now I'll get e-mail from PC connoisseurs who will contest the above observation, but it's really like taking a cola taste test. Who cares? Age of the Information Appliance Macintosh computers have not been commodified! The blueberry iMac singing a solo on the cover of the latest Neiman Marcus mail order catalog proves that. Instead the new Macs are delivering the human qualities that he rest of us have always longed for in our computers, yet no one but Apple has ever seriously tried to deliver. Apple has avoided the commodification nightmare that now confounds the PC industry by having the temerity to suggest that color was the most important thing that consumers need to consider when choosing a computer. Thus the birth of the iMac and with it the beginning of the Age of the Information Appliance. Giants, like Sony, are watching this insane experiment and salivating over the possibilities. Until now, in a hostile IT world controlled by geeks with a vested interested in keeping the technology as arcane as possible, the Mac tactic of making computing accessible for the rest of us hasn't panned out. The tide is turning as the hoi polloi who want/need ease of use, quality, individuality and fashion are, at long last, inspired to computerize their lives by the confluence of occupational necessity and the "killer app" that is the WWW. Surprisingly, the PC giants still don't get it. They just keep churning out more beige boxes, slash margins and fight over the fully saturated enterprise turf. Their only answer to the burgeoning consumer market is lower prices on yesterday's hardware and the daring use of Bondi blue in Intel magazine ads. Meanwhile, Apple is morphing into a consumer information appliance provider perfectly timed with a hugely expanding information-based economy, full employment and a surge in consumer spending. Our economy which has been on a major roll for three years now hasn't really seen the type of stepped up consumer spending that is often associated with rapid GNP growth. Economists say much of the GNP growth reflects increases in productivity; strong consumer spending is just now kicking in big time. The cyclical stock boomlet going on indicates the market is expecting pent up consumer demand to be released in an orgy of spending. This is how the new Apple fits in with the economy. Apple is no longer a pure technology stock. Like a wily old big board surfer, Jobs and Co. are in the sweet spot to catch the coming big kahuna in consumer spending that is now swelling towards the shore of our economy. Your comments are welcomed.